2007 Results, 2008 Outlook, and Customer Implications

UtiliPoint IssueAlert
Patrick Reames

If your company purchased a new energy trading and/or risk management (ETRM) system in 2007, clearly you were not alone. 2007 was a remarkable year for the number of new systems sold in North America. The market expansion that first appeared in 2004/2005 continues as commodity prices and volatility remain high, leading buyers to seek solutions that can help them better manage the risks of their business, while at the same time, take advantage of the opportunities this market has to offer.

If you’re currently in the market for a new ETRM system, the results of 2007 may be a mixed bag. Clearly, you want to do business with a solutions provider that is financially healthy, one that you know will be around when you need them. From that perspective, the 2007 results should be encouraging as one of the more remarkable aspects of this very active market is the near parity amongst the leading vendors producing ETRM solutions.

In our review of the 2007 results, it was quite striking that of the leading vendors, it would be very difficult to declare that anyone had a significant advantage in terms of number of deals closed. The 2007 market was truly a case of “a rising tide lifts all boats”. Allegro, OATI, OpenLink, Solarc, SunGard and Triple Point all have closed significant numbers of new license sales this year, and for many vendors, their numbers represent records in terms of unit sales and value. Amongst them, this group of vendors account for at least 85 percent of the market for new products.

Though we are, in this article, examining the results for the North American market, it’s notable that in addition to the success these vendors have had in this market, the global demand for their products also continues to grow. This year, we were able to identify more than 20 deals done outside of North America, with the majority of those in Europe, with additional sales in Asia, Australia, and Africa.

The downside of this market for customers is relative to pricing and support…

While pricing is one of the most closely guarded secrets with vendors, clearly product prices are rising. While vendors continue to fight hard for new deals, they are battling each other on the basis of features and functionality. Based on our observations of the market, it appears vendors are much less willing to discount their license fees to land a customer.

As the vendors are enjoying records levels of new client signings, they are simultaneously faced with the issue of trying to find enough qualified resources to staff the new projects. One has only to peruse on-line job listings to see that most of the major vendors and ETRM consulting companies are seeking to hire consulting staff at all levels, from “entry level” consultants through senior level directors of consulting services. The implications are two-fold:

o If you’re contemplating or are in the process of upgrading or replacing systems, you may find yourself having to wait on resources to assist you. Many of the software vendors and third party consulting firms are reporting a back log of business that cannot be currently serviced due to a lack of qualified personnel.
o The quality and experience level of consulting staff is starting to suffer. There is a limited pool of industry experienced resources available. As that pool is being exhausted, many of the software and services firms are finding themselves in the position of hiring and deploying less experienced resources.

2007 Results

UtiliPoint tracked more than 60 “net new” deals for ETRM systems in North America in 2007 (”net new” meaning new client signings, not license expansion deals such as newly licensed commodities, an increase in user counts, or new modules sold to existing customers). We’ve gleaned this information from public sources (press releases), “word on the street” sources, and from discussions with the vendors themselves. We’re certain that we haven’t been able to track every deal, as some ETRM clients are very strict about confidentiality, but we’re confident that we have captured a very large majority of them.

In our analysis we've looked at the 2007 ETRM market results from two perspectives: 1) what commodities were driving new product sales, and 2) which segments, or buyers, were the most active?

Looking at the market place in terms of commodities for 2007, 40% of the deals done involved multiple commodities, with most of those deals involving power and gas. In fact, including those deals that included multiple commodities, power was involved in 53% of all deals and gas in 49%.

Purchases by fuels end-users continued to be an active market for several of the ETRM vendors with just under 1 in 10 deals being done in that market.

These results tracked fairly close to those of 2006, although we did see an uptick in the market share for crude capable systems in the 2007 results.

Looking at the market from the perspective of who’s buying, we note that utilities made up the bulk of the market in terms of unit sales, if not market value. Many of the deals completed in the utility space in 2007 were driven by the restructuring of the power markets currently taking place in California and Texas. Many of these utility deals would be considered relatively small, as many of the buyers were utilities that do not have large scale marketing groups, but are active in the wholesale markets only to buy or sell for balancing needs. Additionally, a large percentage of these deals were sold under ASP (application service provider) licenses, meaning that upfront costs of acquisition were lower than those for traditionally licensed software.

Other active segments were the merchant trading companies, the financially oriented traders (banks and hedge funds), refiners, and exploration and production companies. These results are in line with what have been observed in the previous couple of years, although on an absolute basis, the number of deals done in each of these segments was higher than those previous periods.

In our analysis, the “Other” category made up almost a quarter of the sales this last year. Included in this category are the commercial and industrial end-users purchasing systems to manage fuel and other feedstocks, gas processers, energy retailers, and LNG importers. The end-user segment, while somewhat lower than last year on a “percent of market” basis, showed growth in terms of deal closings and continues to be a growing market for ETRM system providers.

2008 Outlook

In our discussions with many of the solutions providers, they are clearly optimistic about continued growth in 2008. Based on their current sales funnels, they believe that they will be able to exceed their performance in 2007. The difference between 2007 and 2008 may be in the balance of sales in North America versus those sold internationally.

UtiliPoint believes that the North American market will show growth in 2008, although not at the pace we saw in 2006 to 2007, where we estimate the market grew by about twelve percent in terms of license revenue. We believe that 2008 will show slower growth of around six to eight percent. In fact, it may be that unit sales are flat in 2008, however we believe the license values will be higher as we seeing many of the larger trading organizations starting to make inquiries about the capabilities of the current system offerings to consolidate many of these companies’ legacy systems. Additionally, while we believe utilities will continue to be an active market for ETRM systems, it appears that system replacements driven by the CAISO and ERCOT market changes have peaked as the new markets are scheduled to go into effect this year.

The global markets for ETRM could be the driver of significant growth in 2008. The European market has been fertile ground for US-based vendors and will continue to be so. The Asia-Pacific region will also account for a number of new license deals in 2008. However, based on our conversations with the vendors, we may see significant new markets emerging in South America and, to a lesser extent, Africa. If these markets do develop in line with some of the vendors’ expectations, it could be yet another year of double digit growth.

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